I want to build a multiple linear regression model.
I want to test the effect of a nominal variable with 10+ levels, but I am interested in testing only the effect of 2 of them.
1st Question: How should I include the variable in the model?
- I can exclude the non-interesting observations from the data set (it is very large), thus transforming the nominal variable into a binary one
- Alternatively I could code it as two (k-1) dummy variables, labelling all the other levels as "other"
2nd Question: How to test and interpret their significance?
- If i turn it into a binary variable by filtering the data set, how do I test and interpret the effect of the level which takes the value of 0?
I think I should use an F-test but I have some control variables (all categorical as well), so I am not sure how would the interpretation of the constant work in that case.
Note: the model has target age as dependent variable. The categorical variable is acquisition reason. I am trying to predict target age according to the takeover purpose of the buying company.